Three Reasons To Use Private Mortgage Lenders

by Jonathan Squire on April 1, 2011

Private mortgage lenders are often overlooked by investors looking to finance their next real estate purchase – but there are real advantages in using them. The difference between regular mortgage financiers and private mortgage lenders is that the former is made up of banks or other general financial institution, whereas the latter provides specialist lending services, generally to real estate investors. Private lenders often provide the flexibility that real estate investors need in structuring their loans – allowing more flexibility for investors who have access to funds through private mortgage lending.

There are a number of key differences when you look at a private mortgage lender compared to a regular lender – some are positive and some negative, but they are incredibly handy to know about. That is because there are some instances where a regular mortgage lender just will not provide finance – but a private mortgage lender will. Depending on your lender mortgage insurance may also be a necessary consideration, but this is totally dependent on who your loan is with. Let’s take a closer look at how it all works.

I know that when real estate investors decide to purchase a property, they will generally want the deal to close immediately, or for it to take a longer time – sometimes a year or more. The key to a quick close is having your finance set up quickly to close the deal and have contracts exchanged. That is where private mortgage lenders really come in handy.

Unlike traditional money lenders, a private firm will be able to complete a transaction within about a week. This compares to the 2 to 3 month wait for conventional mortgage providers. That is because they have so much less to do before they issue the funds. For some of the reasons for this, read on below regarding the qualification process. The speed also translates to the approval process, which is generally within 24hrs. A traditional lender such as a bank may claim to have approvals back within 24hrs, but they are usually conditional, and not final.

Issues around qualifying

The key difference between private mortgage lenders and other sources of finance is the qualification process. Traditional mortgage providers concern themselves with your credit history, your debt level, tax returns and financial statements and much more. All this information takes time to compile and ensure is up to date, then they need to be checked and decided upon. All of which contributes to delays you just do not want.

In contrast, a private mortgage lender is not concerned with those details, they are concerned with the appraised value of the property – that is the main criteria for loan approval. In addition to the property, another consideration is the income that the property produces – these two elements provide the security for the loan. The value of the loan will generally be no more than 70% of the appraised value of the property, and you will receive less of a percentage if the property produces no income – say a block of land.

Terms of the loan

A loan with a private mortgage lender will have very different terms that you will be used to from your experiences with regular lending institutions. Remember that these loans are geared towards professional real estate investors. They are generally for short periods of time, usually no more than two or three years and have a higher interest rate. The rate is usually around 5% higher than the prime rate, and is thus considerably higher than conventional loans.

Despite these sometimes seemingly onerous terms, a loan with a private mortgage lender can really help you advance your interests in real estate. It is all well and good to have a loan with a conventional lender ready and set to go – and that is advisable, but not always possible. There are good reasons to go with one of the many private mortgage companies. These include privacy, where it is important to keep your financials under wraps, and speed – where you want to close a deal ASAP.

Either way, private mortgage lenders are a fantastic resource for professional investors to obtain the finance they need to conduct their business. These private mortgage loans offer great flexibility and opportunity to investors – and not just private mortgage investors either. The traditional view with mortgages is that the lender is the one who profits from the arrangement – but real estate investors who take out private mortgage finance also stand to profit from finding quick solutions to their need to access funds at short notice.

So, next time you are shopping for finance options for your next investment purchase, look at private lenders for mortgages. Or on the other hand you could consider using a private mortgage broker to help narow your search a little.

Jonathan is an investor and absolute real estate enthusiast who is often found on Google +. When he's not crunching numbers and evaluating investment options he's travelling with his family.
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Lawrence

I’m a builder in Grand Junction, Co and I am interested in securing funding to purchase properties in my local area rehab them and put them back on the market. I have the experience just need the capital.

http://www.privatemoneybank.com/tgannet todd

We have private money lending available for investment properties. Please let me know if we can help, thank you

Hi Lawrence, yours is a common theme – a motivated and enthusiastic entrepreneur who needs a business partner with access to the funding to make it happen. Keep looking, and good luck!
Jonathan

Bryan Lee

Hello,
I am interested in purchasing a home between $200,000 to $250,000 value and able to put down $100,000. Can you help me finance the rest?

Thank you

http://www.realestatemad.com/ Jonathan Squire

Hi Bryan, I’d like to help you out, but we at realestatemad.com are not in the private lending business. Look and ask around in your local area and you’ll be sure to find a way to access the funds you need. Good luck,
Jonathan

Jacquii Moss

How do I find private mortgage companies? Most of the websites that I have seen seem hokey.

http://www.realestatemad.com/ Jonathan Squire

Hi Jacquii and thanks for your comment. I know exactly what you mean by the ‘hokey’ website description, and really the only answer I have is to look for a more bricks and mortar business in your local area. Private mortgage lenders are around – but I’ve had the most success when I have walked through the door of their shopfront, rather their website. Hopefully things will change, but for now that’s my experience.

Tommitch

Hi Jonathon,

I am in a situation where i require a private mortgage and have been told i can get one but i am being hit with start up fees of 2.75%. Is this excessive?

http://www.realestatemad.com/ Jonathan Squire

Hi there, and thanks for your question. Initial fees are very common in the mortgage lending marketplace – and vary from lender to lender. While your more traditional lenders will generally charge anything from about 1% to 2.25% in start up fees, private mortgage lenders do generally charge a premium for their services. This can translate to higher establishment fees like you’re describing. While 2.75% is not extraordinarily high, it’s also not great – but that is something you’ll have to weigh up as part of your decision making process. Another consideration is that other prospective lenders may have lower start up fees, but they may compensate for that later in the life of the loan by higher charges elsewhere – it’s a balancing act. At the end of the day, 2.75% is not horribly excessive, but you do need to consider the whole range of costs you will be incurring. Thanks for a great question!

@WeSellerFinance

good article…

Janet Magana

Very good article Thanks. My husband and I try to get a loan he got approved by the bank but unfortunately he doesn’t have a legal status and that’s why he couldn’t get the loan, he does have work and does pay taxes. Do private lenders check legal status too?

ErikRosen

Thanks for your comments Janet, it’s greatly appreciated. I’m sorry to hear that your husband has faced a few hurdles getting the loan, despite approval. These days there are many private lenders who offer a wide variety of loans and I don’t see that there should be too much of a problem in your situation. My recommendation is to keep shopping around – you’ll be able to find a source of finance for your mortgage. Good luck, and let us know how you get on!